Module 9: Advanced Risk Management & Long-Term Trading Success

Question 1

Question: What is risk management in trading?

Answer 1

Answer: Risk management involves strategies to minimize losses and protect capital while maximizing trading gains.

Question 2

Question: Why is risk management crucial for traders?

Answer 2

Answer: It prevents excessive losses, maintains account stability, and ensures long-term trading success.

Question 3

Question: Why is risk management crucial for traders?

Answer 3

Answer: It prevents excessive losses, maintains account stability, and ensures long-term trading success.

Flashcard 107Question: What are the key components of risk management?Answer:

Position sizing

Stop-loss orders

Risk-reward ratios

Diversification

Hedging strategies

Question 4

Question: What is diversification in trading?

Answer 4

Answer: Diversification involves spreading investments across multiple assets to reduce risk.

Question 5

Question: How does diversification help traders?

Answer 5

Answer: It minimizes exposure to a single stock or market sector, reducing the impact of a bad trade or downturn.

Question 6

Question: What is the 2% rule in risk management?

Answer 6

Answer: The 2% rule suggests that traders risk no more than 2% of their total capital on a single trade.

Question 7

Question: How do traders calculate risk-reward ratio?

Answer 7

Answer: The risk-reward ratio is calculated by dividing potential profit by potential loss. A good ratio is typically 2:1 or higher.

Question 8

Question: What is hedging in trading?

Answer 8

Answer: Hedging is using strategies like options, inverse ETFs, or other asset classes to offset potential losses in a portfolio.

Question 9

Question: How do traders hedge against market downturns?

Answer 9

Answer: By buying put options, inverse ETFs, or diversifying into assets like bonds and commodities.

Question 10

Question: What is drawdown in trading?

Answer 10

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Answer: Drawdown is the percentage drop from a trader’s peak capital before recovery.

Question 11

Question: What is risk-adjusted return?

Answer 11

Answer: A measure of how much return a trader makes relative to the risk taken.

Question 12

Question: How does leverage impact risk management?

Answer 12

Answer: Leverage amplifies both gains and losses, making proper risk controls essential.

Question 13

Question: Why should traders keep a risk journal?

Answer 13

Answer: Tracking risks and mistakes helps traders improve and avoid repeating costly errors.

Question 14

Question: How does long-term portfolio management differ from active trading?

Answer 14

Answer: Long-term portfolios focus on gradual wealth accumulation with less frequent trades, while active trading seeks short-term gains.

Question 15

Question: What are the benefits of compounding returns in long-term investing?

Answer 15

Answer: Compounding allows reinvested profits to generate additional earnings, significantly growing wealth over time.